Banking Competition and Real Sector Stability: Does the Risk Shifting Channel Exist?

42 Pages Posted: 13 Nov 2011  

Felix Noth

Otto-von-Guericke University; Halle Institute for Economic Research

Date Written: April 12, 2011

Abstract

Recent theoretical literature in the field of banking competition and bank risk stresses the importance of interactions between banks and firms and suggests that banking competition impacts firm stability. But empirical evidence whether banking competition increases or decreases stability of firms in the real sector is scarce. This paper investigates the effect of banking competition on firm stability for a sample of small- and medium-size enterprises (SMEs) in Germany between 1996-2006. Results show that less banking competition is beneficial for firm stability. This rejects recent suggestions from the banking literature that banks may exploit their competitiveness and increase incentives for firms to undertake more risk. Thereby, this paper suggests the often cited charter value paradigm in banking to be right.

Keywords: Banking competition, Firm stability, Risk shifting

JEL Classification: G21, G32

Suggested Citation

Noth, Felix, Banking Competition and Real Sector Stability: Does the Risk Shifting Channel Exist? (April 12, 2011). Available at SSRN: https://ssrn.com/abstract=1958614 or http://dx.doi.org/10.2139/ssrn.1958614

Felix Noth (Contact Author)

Otto-von-Guericke University ( email )

Universitätspl. 2
PSF 4120
Magdeburg, D-39106
Germany

Halle Institute for Economic Research

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
Halle, 06108
Germany

HOME PAGE: http://www.iwh-halle.de/asp/person.asp?fnh&Lang=e&Abteilung=fin

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